Fuqi Prospectus

8/14/2019 Fuqi Prospectus

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As Filed with the Securities and Exchange Commission on October 2, 2007

Registration No. 333-144290

UNITED STATESSECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

PRE-EFFECTIVE AMENDMENT NO. 2 ON

FORM S-1/A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

FUQI INTERNATIONAL, INC.(Name of Registrant As Specified in its Charter)

Delaware 3911 20-1579407(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)Incorporation or Organization) Classification Code Number)

5/F., Block 1, Shi Hua Industrial ZoneCui Zhu Road North

Shenzhen, 518019Peoples Republic of China (PRC)

+86 (755) 2580-1888(Address and Telephone Number of Principal Executive Offices)

Corporation Service Company

2711 Centerville RoadSuite 400

Wilmington, DE 19808800-222-2122

(Name, Address and Telephone Number of Agent for Service)Copies to

Thomas J. Poletti, Esq.

Anh Q. Tran, Esq.

Kirkpatrick & Lockhart Preston Gates Ellis LLP

10100 Santa Monica Blvd., 7th Floor

Los Angeles, CA 90067

Telephone (310) 552-5000

Facsimile (310) 552-5001

Marjorie Sybul Adams, Esq.

Matthew D. Adler, Esq.

DLA Piper US LLP

1251 Avenue of the Americas

New York, NY 10020

Telephone: (212) 335-4500

Facsimile: (212) 335-4501

Approximate Date of Proposed Sale to the Public: As soon as practicable after the effective date of this RegistrationStatement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415under the Securities Act of 1933, check the following box.

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the

following box and list the Securities Act registration statement number of the earlier effective registration statement for the same

offering.

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and

list the Securities Act registration statement number of the earlier effective registration statement for the same offering.

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and

list the Securities Act registration statement number of the earlier effective registration statement the same offering.

CALCULATION OF REGISTRATION FEE


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Title of Each Class of Securities To Be Registered Proposed Maximum Aggregate Offering Price Amount of Registration Fee (2)

Common Stock, $.001 par value per share $ 66,498,750 (1) $ 2,041.51 (3)

(1) The registration fee for securities to be offered by the Registrant is based on an estimate of the offering price and such estimateis solely for the purpose of calculating the registration fee pursuant to Rule 457(o). Includes $8,673,750 from shares that the

underwriters have the option to purchase to cover over-allotments, if any.

(2) Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price.

(3) Of this amount, $1,765.25 was previously paid upon the original filing of the Form S-1 on July 2, 2007 and the remaining$276.26 is being paid with this filing of Amendment No. 2.

The Registrant amends this registration statement on such date or dates as may be necessary to delay its effective dateuntil the registrant shall file a further amendment which specifically states that this registration statement shall hereafter

become effective in accordance with Section 8(a) of the Securities Act of 1933, or until the registration statement shallbecome effective on such date as the Commission, acting pursuant to Section 8(a), may determine.

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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration

statement filed with the Securities and Exchange Commission becomes effective. This prospectus is not an offer to sell these

securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED OCTOBER 2, 2007

6,425,000 SHARES

FUQI INTERNATIONAL, INC.COMMON STOCK

This is our initial public offering of shares of our common stock. We are offering 6,425,000 shares. We expect that the public

offering price of our common stock will be between $7.00 and $9.00 per share.

Currently no public market exists for shares of our common stock. We have applied for the listing of our common stock on The

Nasdaq Global Market under the trading symbol FUQI.

Investing in our common stock involves risks.

See Risk Factors beginning on page 7 of this prospectus.

Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved of these

securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Per Share Total

Public offering price $ $Underwriting discounts and commissions $ $Proceeds, before expenses, to Fuqi International, Inc. $ $

Fuqi International, Inc. has granted the underwriters a 30-day option to purchase up to an additional 963,750 shares of common

stock to cover over-allotments.

Merriman Curhan Ford & Co.

Brean Murray, Carret & Co.

The date of this Prospectus is , 2007


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Above: A sampling of the Companys products.

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You should rely only on information contained in this prospectus. We have not, and the underwriters have not,

authorized any other person to provide you with different information. This prospectus is not an offer to sell, nor is itseeking an offer to buy, these securities in any state where the offer or sale is not permitted. The information in thisprospectus is complete and accurate as of the date on the front cover, regardless of the time of delivery of this prospectus orany sale of our common stock. Our business, financial condition, results of operations and prospects may have changed

since that date. In this but the information may have changed since that date. Unless the context otherwise requires, theterms we, the Company, us, or Fuqi refer to Fuqi International, Inc., a Delaware corporation, and its predecessors

and wholly-owned subsidiaries.

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Page

Prospectus Summary 1

Summary Consolidated Financial Data 6


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Risk Factors 7Special Note Regarding Forward-Looking Statements 21Use of Proceeds 22Dividend Policy 22Market Information 22Capitalization 23Dilution 24Selected Consolidated Financial Data 25Managements Discussion and Analysis of Financial Condition and Results of Operations 27Business 43Management 54Certain Relationships and Related Transactions 65Beneficial Ownership of Certain Beneficial Owners and Management 67Description of Securities 68Shares Eligible for Future Sale 71Underwriting 73Legal Matters 76Experts 76Additional Information 76Index to Financial Statements F-1

Fuqi and the Fuqi logo are our registered trademarks. Other trademarks, trade names and service marks used in this

prospectus are the property of their respective owners

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PROSPECTUS SUMMARY

Because this is only a summary, it does not contain all of the information that may be important to you. You should carefully

read the more detailed information contained in this prospectus, including our financial statements and related notes. Our business

involves significant risks. You should carefully consider the information under the heading Risk Factors beginning on page 7 .

Unless the context otherwise requires, the terms we, the Company, us, or Fuqi refer to Fuqi International, Inc., a

Delaware corporation, and its predecessors and wholly-owned subsidiaries.

OverviewWe are a leading designer of high quality precious metal jewelry in China, developing, promoting, and selling a broad range of

products to the rapidly expanding Chinese luxury goods market. According to Global Industry Analysts, Inc., or GIA, Chinas

jewelry industry grew to $14 billion in 2005 and China is expected to lead global jewelry processing and consumption by 2010.

Our products consist of a range of unique styles and designs made from precious metals such as gold, platinum, and Karat gold

(K-gold), as well as diamonds and other precious stones. Our design database presently contains over 20,000 unique products. We

continuously innovate and change our designs based upon consumer trends in China. By continuously creating new designs and

rapidly bringing them to market, we believe we are able to differentiate ourselves from our competitors and strengthen our brand

identity.

Our nationwide distribution network and significant relationships with retailers allow us to test-market, promote and sell our

products in almost every province in China. We believe our vertically integrated direct sales operations, which include product

development, sales and marketing, and order fulfillment and delivery, allow us to effectively reach consumers and maximize sales

throughout China.We have historically sold our products directly to distributors, retailers and other wholesalers, who then sell our products to

consumers through both retail counters located in department stores and in traditional stand-alone jewelry stores. We sell our

products to our customers at price points that reflect the market price of the base material, plus a mark-up reflecting our design fees

and processing fees. Typically this markup ranges from 10 12%. Our customers then further mark up our products to the

consumers, up to an additional 30%. Our target price points are primarily designed to appeal to Chinas growing middle class.

In order to capitalize on the substantial growth in consumer spending on luxury goods in China and capture the margin

appreciation from direct sales to consumers, we recently initiated a retail strategy in product categories where we believe we will

not compete with our existing sales channels. Our retail strategy will focus on finished gemstone jewelry, which we previously

provided only on a custom-order basis and which has historically represented only a nominal percentage of our overall sales.

We intend to open new retail locations by leasing unoccupied space, acquiring existing leases from third parties and/or

acquiring the existing jewelry operations of third parties that occupy retail space. During 2007, we intend to open 20 retail counters


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and 2 retail stores in municipalities and provincial capitals throughout China. In 2008, we plan to open 60 to 80 retail counters and

8 to 10 retail stores. We believe our expansion into the retail market will provide us with:

direct access to the consumer market, allowing us to respond more rapidly to changing consumer tastes;

an opportunity to grow our revenue base as we roll out our retail strategy;

improved net margins from higher markups in the retail market; and

increased brand awareness.

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Our company is headquartered in the city of Shenzhen, in southern China, where we have a large-scale production base that

includes a modern factory of more than 53,000 square feet, a dedicated senior design, sales and marketing team, and more than 600

company-trained employees. We believe our current facilities provide adequate space for our planned expansion of our production

lines, which will include diamond and other finished gemstone jewelry.

Our sales grew at an average rate of 57% per annum, reaching $92.4 million in 2006, from $15.2 million in 2002. To date, the

increase in our sales has occurred organically, without the acquisition of other companies. Our income from operations grew from

$1.0 million in 2002 to $7.5 million in 2006, while our net income grew from $1.0 million in 2002 to $5.8 million in 2006.

Industry Background and Trends

Chinas market for jewelry and other luxury goods is expanding rapidly, due in part to the countrys rapid economic growth.

According to the Economist Intelligence Unit (EIU), Chinas real gross domestic product, or GDP, grew by 10.1%, 10.4% and10.7% in 2004, 2005 and 2006, respectively. Economic growth in China has led to greater levels of personal disposable income and

increased spending among Chinas expanding consumer base. According to the EIU, private consumption has grown at a 9%

compound annual growth rate, or CAGR, over the last decade. According to Global Industry Analysts, Inc. (GIA), the precious

jewelry market in China has increased by 35% from 2001, reaching $14.9 billion in 2006. The total market size for precious

jewelry is expected to exceed $18.2 billion in 2010.

We believe that Chinas jewelry market will continue to grow as the Chinese economy expands and develops. Because gold has

long been a symbol of wealth and prosperity in China, demand for jewelry, particularly gold jewelry, is firmly embedded in the

countrys culture. The jewelry market is currently benefiting from rising consumer spending and rapid urbanization of the Chinese

population. We believe jewelry companies like ours, with developed distribution networks, high quality products and attractive

designs, are well-positioned to build their brands and capture increasingly large shares of the growing jewelry market.

Our Strengths, Strategies and Challenges

We believe our competitive strengths consist of our:

experienced management team;

leading market position;

well-established distribution channels;

proven product design and manufacturing capabilities;

extensive design database with over 20,000 product styles; and

customer service expertise.

Notwithstanding our competitive strengths, we expect to face certain risks and uncertainties, including:

challenges of expanding our business beyond wholesale distribution into the retail market;

our ability to identify market trends and to develop and introduce new products in response to those trends;

changes in economic conditions in China that may affect discretionary consumer spending; fluctuations in the price of raw materials;

our ability to respond to competitive market conditions;

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our ability to develop our product brands; and

uncertainties with respect to the PRC legal and regulatory environments.


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Our goal is to be the leading vertically-integrated designer, manufacturer, and retailer of jewelry in China. We intend to achieve

our goal by implementing the following strategies:

strengthen our existing wholesale distribution channels;

establish and expand our retail market footprint;

expand existing and new product offerings; and

increase marketing and promotion efforts to enhance brand awareness.

Corporate Information

Our company, Fuqi International, Inc., operates through our wholly-owned subsidiary, Fuqi International Holdings Co., Ltd., a

British Virgin Islands corporation (Fuqi BVI) and its wholly-owned subsidiary, Shenzhen Fuqi Jewelry Co., Ltd., a company

established under the laws of China (Fuqi China). Fuqi International, Inc. effected a reverse merger transaction in November2006 that resulted in our current corporate structure and subsequently reincorporated in Delaware on December 8, 2006. For further

information concerning our reverse merger transaction, see Managements Discussion and Analysis of Financial Condition and

Results of Operations Corporate History on page 28 of this prospectus.

Our principal executive offices are located at 5/F., Block 1, Shi Hua Industrial Zone, Cui Zhu Road North, Shenzhen, 518019,

Peoples Republic of China. Our telephone number is +86 (755) 2580-1888. Our website is located at www.fuqi.com.cn.

Information contained on, or that can be accessed through, our website is not part of this prospectus.

Conventions That Apply to This Prospectus

Unless we indicate otherwise, references in this prospectus to:

China and the PRC are to the Peoples Republic of China, excluding, for the purposes of this prospectus only, Taiwanand the special administrative regions of Hong Kong and Macau;

common stock are to our shares of common stock, par value $0.001 per share; RMB and Renminbi are to the legal currency of China; and

$, US$ and U.S. dollars are to the legal currency of the United States.

Unless the context indicates otherwise, we, us, our company and our refer to Fuqi International, Inc. and its

predecessors and wholly-owned subsidiaries.

Unless otherwise indicated, information in this prospectus assumes that the underwriters do not exercise their over-allotment

option.

This prospectus contains translations of certain RMB amounts into U.S. dollars. Unless otherwise noted, all translations from

Renminbi to U.S. dollars were made at the noon buying rate in The City of New York for cable transfers in RMB per U.S. dollar as

certified for customs purposes by the Federal Reserve Bank of New York, or the noon buying rate, as of June 29, 2007 which was

RMB 7.6120 to $1.00. For purposes of preparing our consolidated financial statements, our consolidated balance sheets have been

translated from RMB to U.S. dollars at the official rates published by the Peoples Bank of China as of June 30, 2007, and as ofDecember 31, 2006 and 2005 and the statements of income have been translated from RMB to U.S. dollars at the weighted average

of such rates during the periods in which the transactions were recognized. We make no representation that the Renminbi amounts

referred to in this prospectus could have been or could be converted into U.S. dollars at any particular rate or at all. See Risk

Factors Risks Related to This Offering and Our Shares Restrictions on the

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convertibility of RMB into foreign currency may limit our ability to make dividends or other payments in U.S. dollars or fund

possible business activities outside China. On September 28, 2007, the noon buying rate was RMB 7.4928 to $1.00.

Recent Developments

On August 23, 2007 we filed an information statement on Schedule 14C with the Securities and Exchange Commission

(SEC) announcing that our Board of Directors and our stockholders have approved an amendment to our Certificate of

Incorporation to effect a reverse stock split of all our issued and outstanding shares of common stock in the range of 1.1:1 to 2.5:1,

as determined in the sole discretion of our Board of Directors (the Reverse Stock Split). To effect the Reverse Stock Split, we

would file the amendment to the Certificate of Incorporation with the Secretary of the State of Delaware, which would not be done

sooner than 20 days after the information statement was mailed to our stockholders. Our Board of Directors has the discretion to

elect, as it determines to be in the best interest of our company and stockholders, to effect the Reverse Stock Split at any exchange

ratio within the range. The Board, in its sole discretion, may also elect not to implement the Reverse Stock Split. Should the Board

choose to effect the Reverse Stock Split, the number of issued and outstanding shares of our common stock would be reduced in

accordance with the selected exchange ratio for the Reverse Stock Split. There would be a similar reduction in the shares

authorized under the Fuqi International, Inc. 2007 Equity Incentive Plan that we intend to adopt immediately prior to effecting the


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Reverse Stock Split, if at all. The par value and number of authorized shares of our common stock will remain unchanged. On

August 23, 2007, our board of directors approved a Reverse Split at a ratio of 1.69:1. All references to number of shares and per

share amounts included in this prospectus gives effect to this anticipated ratio of the Reverse Stock Split. The number of shares and

per share amounts included in the consolidated financial statements and the accompanying notes, included in the F- section have

been adjusted to reflect the reverse stock split retroactively. Unless otherwise indicated, if and when we effect the Reverse Stock

Split, all outstanding shares and earnings per share information contained in this prospectus gives effect to this anticipated ratio of

the Reverse Stock Split.

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The Offering

Common stock we are offering

6,425,000 shares (1)

Common stock outstanding after the offering

19,260,955 shares (2)

Use of proceeds

We intend to use the net proceeds from this offering for general corporate

purposes, including expansion of our retail operations, expansion of our

production lines, and general working capital purposes. See Use of Proceeds

on page 22 for more information on the use of proceeds.Risk factors

Investing in these securities involves a high degree of risk. As an investor you

should be able to bear a complete loss of your investment. You should

carefully consider the information set forth in the Risk Factors section

beginning on page 7 .

Proposed trading symbol

FUQI

(1) Excludes up to 963,750 shares that may be sold upon exercise of the underwriters over-allotment option.(2) Based on 12,835,955 shares of common stock issued and outstanding as of September 28, 2007. Excludes 1,775,148 shares of

common stock reserved for future issuance under our 2006 Equity Incentive Plan.

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following consolidated statements of operations data for each of the five years ended December 31, 2006, and the balance

sheet data as of December 31, 2006, 2005, 2004, 2003 and 2002 are derived from our audited consolidated financial statements,

which, except for 2003 and 2002, are included elsewhere in this prospectus. The following summary consolidated statement ofoperations data for the six months ended June 30, 2007 and 2006 and unaudited condensed consolidated balance sheet data as of

June 30, 2007 are derived from our unaudited interim condensed consolidated financial statements, which are included elsewhere in

this prospectus. In the opinion of management, our unaudited condensed consolidated financial statements include all adjustments,

consisting principally of normal recurring accruals, that management considers necessary for a fair presentation of the financial

position and the results of operations for these periods. Historical results are not necessarily indicative of the results of operations

for future periods. The following data is qualified in its entirety by and should be read in conjunction with Managements

Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and related

notes included elsewhere in this prospectus.

Consolidated Statement of Operations Data:

Six Months Ended June 30, Years Ended December 31,

2007 2006 2006 2005 2004 2003 2002


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(Unaudited)(In Thousands, Except Share and per Share Amounts)

Net sales $ 54,241 48,524 $ 92,409 $ 72,580 $ 56,765 $ 29,501 $ 15,226Cost of sales 48,024 44,094 83,619 64,964 50,862 26,019 13,592Gross profit 6,217 4,430 8,790 7,616 5,903 3,482 1,634Operating expenses 1,542 784 1,284 1,295 1,555 1,257 589Income from operations 4,675 3,646 7,506 6,321 4,348 2,225 1,045Other income

(expenses)(570) (388) (716) (499) (141) 41 49

Income before

provision for income

taxes

4,105 3,258 6,790 5,822 4,207 2,266 1,094

Provision for income

taxes733 470 995 452 359 193 81

Net income 3,372 2,788 5,795 5,370 3,848 2,073 1,013Other comprehensive

income foreign

currency translation

adjustments

314 71 288 143

Comprehensive income $ 3,686 $ 2,859 $ 6,083 $ 5,513 $ 3,848 $ 2,073 $ 1,013

Earnings per share

basic$ 0.27 $ 0.25 $ 0.51 $ 0.48 $ 0.34 $ 0.19 $ 0.09

Earnings per share

diluted$ 0.22 $ 0.25 $ 0.50 $ 0.48 $ 0.34 $ 0.19 $ 0.09

Weighted average

number ofcommon shares

basic

12,324,705 11,175,543 11,260,544 11,175,543 11,175,543 11,175,543 11,175,543

Weighted average

number of

common shares

diluted

15,393,332 11,175,543 11,631,459 11,175,543 11,175,543 11,175,543 11,175,543

Consolidated Balance Sheet Data:

As of

June 30,

2007

As of December 31,

2006 2005 2004 2003 2002(Unaudited)

(In Thousands)Cash $ 8,494 $ 13,355 $ 71 $ 256 $ 1,294 $ 235Total assets 44,155 31,125 28,115 11,230 8,579 9,097Total liabilities 26,768 20,180 20,508 8,535 5,756 8,660Total stockholders equity 17,387 10,945 7,607 2,695 2,823 437

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should consider carefully the material risks described below

and all of the information contained in this prospectus before deciding whether to purchase any of our securities. Our business,

financial condition or results of operations could be materially adversely affected by these risks if any of them actually occur. None

of our securities are currently listed or quoted for trading on any national securities exchange or national quotation system. If and

when our securities are traded, the trading price could decline due to any of these risks, and an investor may lose all or part of his

investment. Some of these factors have affected our financial condition and operating results in the past or are currently affecting

us. This filing also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ

materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks described

below and elsewhere in this registration statement.

Risks Related To Our Operations


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Jewelry purchases are discretionary, may be particularly affected by adverse trends in the general economy, and an

economic decline will make it more difficult to generate revenue.

The success of our operations depends to a significant extent upon a number of factors relating to discretionary consumer

spending in China. These factors include economic conditions and perceptions of such conditions by consumers, employment rates,

the level of consumers disposable income, business conditions, interest rates, consumer debt levels, availability of credit and levels

of taxation in regional and local markets in China where we manufacture and sell our products. There can be no assurance that

consumer spending on jewelry will not be adversely affected by changes in general economic conditions in China and globally.

While the Chinese economy has experienced rapid growth in recent years, such growth has been uneven among various sectors

of the economy and in different geographical areas of the country. Also, many observers believe that this rapid growth cannot

continue at its current pace and that an economic correction may be imminent. Rapid economic growth can also lead to growth in

the money supply and rising inflation. During the past decade, the rate of inflation in China has been as high as approximately 20%and China has experienced deflation as low as minus 2%. If prices for our products rise at a rate that is insufficient to compensate

for the rise in the costs of supplies such as raw materials, it may have an adverse effect on our profitability. In order to control

inflation in the past, the PRC government has imposed controls on bank credits, limits on loans for fixed assets and restrictions on

state bank lending. The implementation of such policies may impede economic growth. In October 2004, the Peoples Bank of

China, the PRCs central bank, raised interest rates for the first time in nearly a decade and indicated in a statement that the

measure was prompted by inflationary concerns in the Chinese economy. In April 2006 and May 2007, the Peoples Bank of China

raised the interest rate again. Repeated rises in interest rates by the central bank could slow economic activity in China which

could, in turn, materially increase our costs and also reduce demand for our products.

Most of our sales are of products that include gold, platinum, precious metals and other commodities, and fluctuations in

the availability and pricing of commodities would adversely impact our ability to obtain and produce products at favorableprices.

The jewelry industry generally is affected by fluctuations in the price and supply of diamonds, gold, platinum and, to a lesserextent, other precious and semi-precious metals and stones. In the past, we have not hedged our requirement for gold, platinum or

other raw materials through the use of options, forward contracts or outright commodity purchasing, but we intend to engage in

such hedging in the future, depending on our available resources. A significant disruption in our supply of gold, platinum, or other

commodities could decrease our production and shipping levels, materially increase our operating costs and materially adversely

affect our profit margins. Shortages of gold, platinum, or other commodities, or interruptions in transportation systems, labor

strikes, work stoppages, war, acts of terrorism, or other interruptions to or difficulties in the employment of labor or transportation

in the markets in which we purchase our raw materials, may adversely affect our ability to maintain production of our products and

sustain profitability. Although we generally attempt to pass increased

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commodity prices to our customers, there may be circumstances in which we are not able to do so. In addition, if we were to

experience a significant or prolonged shortage of gold, platinum, or other commodities, we would be unable to meet our production

schedules and to ship products to our customers in timely fashion, which would adversely affect our sales, margins and customer

relations. Furthermore, the value of our inventory may be affected by commodity prices. We record the value of our inventory at

the lower of cost (using the first-in, first-out method) or market. As a result, decreases in the market value of precious metals such

as gold and platinum would result in a lower stated value of our inventory, which may require us to take a charge for the decrease

in the value of our inventory.

Due to the geographic concentration of our sales in the northeast region of China, our results of operations and financial

condition are subject to fluctuations in regional economic conditions.

A significant percentage of our total sales are made in the northeast region of China, particularly in the provinces of Liaoning,

Jilin and Heilongjiang, and the city of Beijing. For the six months ended June 30, 2007 and the year ended December 31, 2006,approximately 45.7% and 44.9% of revenues, respectively, was generated from this area. Our concentration of sales in this area

heightens our exposure to adverse developments related to competition, as well as economic and demographic changes in this

region. Our geographic concentration might result in a material adverse effect on our business, financial condition or results of

operations in the future.

Our retail expansion strategy depends on our ability to open and operate a certain number of new counters and stores eachyear, which could strain our resources and cause the performance of our existing operations to suffer.

We have historically been engaged only in the manufacture and wholesale distribution of jewelry products and have only

recently begun retail operations. Our retail expansion strategy will largely depend on our ability to find sites for, open and operate

new retail locations successfully. Our ability to open and operate new retail locations successfully depends on several factors,

including, among others, our ability to:

identify suitable counter and store locations, the availability of which is outside our control;


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purchase and negotiate acceptable lease terms;

prepare counters and stores for opening within budget;

source sufficient levels of inventory at acceptable costs to meet the needs of new counters and stores;

hire, train and retain personnel;

secure required governmental permits and approvals;

successfully integrate new counters and stores into our existing operations;

contain payroll costs; and

generate sufficient operating cash flows or secure adequate capital on commercially reasonable terms to fund ourexpansion plans.

Any failure to successfully open and operate new retail counters and stores could have a material adverse effect on our resultsof operations. In addition, our proposed retail expansion program will place increased demands on our operational, managerial and

administrative resources. These increased demands could cause us to operate our business less effectively, which, in turn, could

cause deterioration in the financial performance of our overall business.

It is not our intention to open new retail counters and stores that materially cannibalize the sales of our existing distributors.

However, as with most growing retail operations, there can be no assurance that sales cannibalization will not inadvertently occur

or become more significant in the future as we gradually increase our presence in existing markets over time to maximize our

competitive position and financial performance in each market.

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Competition in the jewelry industry could cause us to lose market share, thereby materially adversely affecting ourbusiness, results of operations and financial condition.

The jewelry industry in China is highly fragmented and very competitive. We believe that the market may become even more

competitive as the industry grows and/or consolidates. We compete with local jewelry manufacturers and large foreign

multinational companies that offer products that are similar to ours. Some of these competitors have larger local or regional

customer bases, more locations, more brand equity, and substantially greater financial, marketing and other resources than we have.

As a result of this increasing competition, we could lose market share, thereby materially adversely affecting our business, results

of operations and financial condition.

We may need to raise additional funds in the future. These funds may not be available on acceptable terms or at all, and,

without additional funds, we may not be able to maintain or expand our business.

We expect that the net proceeds from this offering, together with cash generated from operations, will be sufficient to fund ourprojected operations for at least the next 12 months. We expect to expend significant resources to commence our planned retail

distribution of our manufactured jewelry in China. We will require substantial funds in order to finance our planned retail

distribution, fund operating expenses, to develop manufacturing, marketing and sales capabilities and to cover public company

costs. In addition to the funds required to open retail locations, additional working capital will be needed to operate retail locations

due to longer sales and collection cycles and higher inventory levels required to support retail stores. We also expect to require

substantial funds to change our product mix to include more platinum products. Without these funds, we may not be able to meet

these goals. Also, we expect our general and administrative costs to substantially increase due to higher salaries to be paid to our

executive officers further to employment agreements we intend to enter into, which will come into effect on the effective date of

this offering. See Executive Compensation Compensation Discussion and Analysis.

We may seek additional funding through public or private financing or through collaborative arrangements with strategic

partners.

You should also be aware that in the future: We cannot be certain that additional capital will be available on favorable terms, if at all;

Any available additional financing may not be adequate to meet our goals; and

Any equity financing would result in dilution to stockholders.

If we cannot raise additional funds when needed, or on acceptable terms, we may not be able to effectively execute our growth

strategy (including entering the retail market), take advantage of future opportunities, or respond to competitive pressures or

unanticipated requirements. In addition, we may be required to scale back or discontinue our production and development program,

or obtain funds through strategic alliances that may require us to relinquish certain rights.

Our ability to maintain or increase our revenue could be harmed if we are unable to strengthen and maintain our brandimage.

We believe that primary factors in determining customer buying decisions in Chinas jewelry sector include price, confidence in

the merchandise sold, and the level and quality of customer service. The ability to differentiate our products from competitors by


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our brand-based marketing strategies is a key factor in attracting consumers, and if our strategies and efforts to promote our brand,

such as television and magazine advertising and beauty contest sponsorships, fail to garner brand recognition, our ability to

generate revenue may suffer. If we are unable to differentiate our products, our ability to sell our products wholesale and our

planned sale of products retail will be adversely affected. If we fail to anticipate, identify or react appropriately or in a timely

manner to customer buying decisions, we could experience reduced consumer acceptance of our products, a diminished brand

image, higher markdowns, and costs to recast overstocked jewelry. These factors could result in lower selling prices

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TABLE OF CONTENTSand sales volumes for our products, which could adversely affect our financial condition and results of operations. This risk is

particularly acute because we rely on a limited demographic customer base for a large percentage of our sales.

There is only one source in China for us to obtain the precious metals used in our jewelry products; accordingly, any

interruptions of our arrangement with this source would disrupt our ability to fill customer orders and substantially affectour ability to continue our business operations.

Under PRC law, supply of precious metals such as platinum, gold, and silver are highly regulated by certain government

agencies. Shanghai Gold Exchange is the only source of supply in China for precious metals used in our jewelry products. We are

required to obtain several membership and approval certificates from government agencies in order to do business involving

precious metals. We may be required to renew such memberships and to obtain approval certificates periodically. The loss of or

inability to renew our membership relationship with the Shanghai Gold Exchange, or its inability to furnish precious metals to us as

anticipated in terms of cost, quality, and timeliness, would adversely affect our ability to fill customer orders in accordance with

our required delivery, quality, and performance requirements. If this were to occur, we would not have any alternative suppliers in

China to obtain our raw materials from, which would result in a decline in revenue and revenue potential and risk the continuation

of our business operations.

If we are not able to adapt to changing jewelry trends in China, our inventory may be overstocked and we may be forced to

reduce the price of our overstocked jewelry or incur the cost to recast it into new jewelry.

We depend on consumer fashions, preferences for jewelry and the demand for particular products in China. Jewelry design

trends in China can change rapidly, as evidenced by the recent increase in the consumption of platinum jewelry in the Chinese

market. The ability to predict accurately future changes in taste, respond to changes in consumer preferences, carry the inventory

demanded by customers, deliver the appropriate quality, price products correctly and implement effective purchasing procedures,

all have an important influence on determining sales performance and achieved gross margin. If we fail to anticipate, identify or

react appropriately to changes in styles and trends, we could experience excess inventories, higher than normal markdowns or an

inability to sell our products. If such a situation exists, we may need to incur additional costs to recast our products to fit the

demand, recovering only the value of raw material and all labor invested in the product would be lost.

Our failure to manage growth effectively could have an adverse effect on our employee efficiency, product quality, working

capital levels, and results of operations.

We intend to conduct a growth strategy into retail distribution of our products that we believe will result in rapid growth, which

will place significant demands on our managerial, operational and financial resources. Any significant growth in the market for our

current wholesale business and our planned retail distribution would require us to expand our employee base for managerial,

operational, financial, and other purposes. During any growth, we may face problems related to our operational and financial

systems and controls, including quality control and delivery and service capabilities. We would also need to continue to expand,

train and manage our employee base. We currently have approximately 600 full-time employees, and, at that size, a rapid increase

in the number of our employees would be difficult to manage. Continued future growth will impose significant added

responsibilities upon the members of management to identify, recruit, maintain, integrate, and motivate new employees. If we are

able to expand our retail business, we would need to train or hire additional employees with retail experience.

Aside from increased difficulties in the management of human resources, we may also encounter working capital issues, as we

will need increased liquidity to finance the purchases of raw materials and supplies, development of new products, establishment of

new retail stores, and the hiring of additional employees. Our failure to manage growth effectively may lead to operational and

financial inefficiencies that will have a negative effect on our profitability. We cannot assure you that we will be able to timely and

effectively meet that demand and maintain the quality standards required by our existing and potential customers.

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We rely on our distribution network for a significant portion of our revenues. Failure to maintain good distributor relations

could materially disrupt our distribution business and harm our net revenues.


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Our business has become increasingly dependent on the performance of our distributors. During the six months ended June 30,

2007 and the years ended December 31, 2006, 2005 and 2004, 20%, 13%, 10% and 14%, respectively, of our net revenues were

generated through our distributors. We currently have 136 distributors. Our largest distributor accounted for approximately 4% and

2% of our gross revenues in 2006 and 2005. We do not maintain long-term contracts with our distributors. Maintaining

relationships with existing distributors and replacing any distributor may be difficult or time consuming. Our failure to maintain

good relationships with our distributors could materially disrupt our distribution business and harm our net revenues.

We must maintain a relatively large inventory of our raw materials and jewelry products to support customer deliveryrequirements, and if this inventory is lost due to theft, our results of operations would be negatively impacted.

We purchase large volumes of precious metals approximately five times per month and store significant quantities of raw

materials and jewelry products at our warehouse and show room in Shenzhen, China. Although we have an inventory security

system in place, in the past we have experienced minor inventory theft at, or in transit to or from, certain of these facilities. We maybe subject to future significant inventory losses due to third-party or employee theft from our warehouses or other forms of theft.

The implementation of security measures beyond those that we already utilize, which include metal detectors for employees,

security cameras, and alarm systems in our warehouse, would increase our operating costs. Also, any such losses of inventory could

exceed the limits of, or be subject to an exclusion from, coverage under our insurance policies. Claims filed by us under our

insurance policies could lead to increases in the insurance premiums payable by us or the termination of coverage under the

relevant policy.

Substantial defaults by our customers on accounts receivable could have a material adverse affect on our liquidity and

results of operations.

A substantial portion of our working capital consists of accounts receivable from customers. If customers responsible for a

significant amount of accounts receivable were to become insolvent or otherwise unable to pay for our products, or to make

payments in a timely manner, our liquidity and results of operations could be materially adversely affected. An economic or

industry downturn could materially adversely affect the servicing of these accounts receivable, which could result in longerpayment cycles, increased collections costs and defaults in excess of managements expectations. In addition, as we increase our

presence in the retail market, we expect the aging of our accounts receivable generated from sales through retail counters to

increase as department stores typically defer payments to us of cash receipts collected by them on our behalf. A significant

deterioration in our ability to collect on accounts receivable could affect our cash flow and working capital position and could also

impact the cost or availability of financing available to us.

We are dependent on certain key personnel and loss of these key personnel could have a material adverse effect on our

business, financial condition and results of operations.

Our success is, to a certain extent, attributable to the management, sales and marketing, and operational and technical expertise

of certain key personnel. Each of our named executive officers, including our Chief Executive Officer, Mr. Yu Kwai Chong,

performs key functions in the operation of our business. There can be no assurance that we will be able to retain these officers or

that such personnel may not receive and/or accept competing offers of employment. The loss of a significant number of these

employees could have a material adverse effect upon our business, financial condition, and results of operations. We do notmaintain key-man life insurance for any of our senior management.

We have significant outstanding short-term borrowings, and we may not be able to obtain extensions when they mature.

Our notes payable to banks for short-term borrowings as of June 30, 2007, December 31, 2006 and 2005 were $16.4 million,

$14.1 million, $12.4 million, respectively, and bore weighted average

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interest rates of 6.67%, 6.14%, and 5.32%, respectively. Of these outstanding borrowings, $8.7 million, $11.5 million and $13.0

million were arranged or guaranteed by our controlling stockholder, Mr. Yu Kwai Chong, as of June 30, 2007, December 31, 2006and 2005, respectively. In addition, we have short-term borrowings from Mr. Chong, the outstanding amount of which was $0 and

$422,909 and as of June 30, 2007 and December 31, 2006, respectively.

Generally, these short-term bank loans mature in one year or less and contain no specific renewal terms. However, in China it is

customary practice for banks and borrowers to negotiate roll-overs or renewals of short-term borrowings on an on-going basis

shortly before they mature. Although we have renewed our short-term borrowings in the past, we cannot assure you that we will be

able to renew these loans in the future as they mature. In particular, a substantial portion of our short-term borrowings are arranged

or guaranteed by Mr. Yu Kwai Chong, our controlling stockholder, or one of his affiliated companies. Since Mr. Chong ceased to

be our sole stockholder in November 2006, he may be less inclined to guarantee our bank borrowings. If we are unable to obtain

renewals of these loans or sufficient alternative funding on reasonable terms from banks or other parties, we will have to repay

these borrowings with the cash on our balance sheet or cash generated by our future operations, if any. We cannot assure you that

our business will generate sufficient cash flow from operations to repay these borrowings.


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Our quarterly results may fluctuate because of many factors and, as a result, investors should not rely on quarterly

operating results as indicative of future results.

Fluctuations in operating results or the failure of operating results to meet the expectations of public market analysts and

investors may negatively impact the value of our securities. Quarterly operating results may fluctuate in the future due to a variety

of factors that could affect revenues or expenses in any particular quarter. Fluctuations in quarterly operating results could cause the

value of our securities to decline. Investors should not rely on quarter-to-quarter comparisons of results of operations as an

indication of future performance. As a result of the factors listed below, it is possible that in future periods results of operations

may be below the expectations of public market analysts and investors. This could cause the market price of our securities to

decline. Factors that may affect our quarterly results include:

vulnerability of our business to a general economic downturn in China;

fluctuation and unpredictability of costs related to the gold, platinum and precious metals and other commodities used tomanufacture our products;

seasonality of our business;

changes in the laws of the PRC that affect our operations;

our recent entry into the retail jewelry market;

competition from our competitors;

our ability to obtain all necessary government certifications and/or licenses to conduct our business; and

development of a public trading market for our securities after this offering;

Risks Related To Doing Business In China

All of our assets are located in China and all of our revenues are derived from our operations in China, and changes in the

political and economic policies of the PRC government could have a significant impact upon what business we may be ableto conduct in the PRC and accordingly on the results of our operations and financial condition.

Our business operations may be adversely affected by the current and future political environment in the PRC. The Chinese

government exerts substantial influence and control over the manner in which we must conduct our business activities. Our ability

to operate in China may be adversely affected by changes in Chinese laws and regulations, including those relating to taxation,

import and

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export tariffs, raw materials, environmental regulations, land use rights, property and other matters. Under the current governmentleadership, the government of the PRC has been pursuing economic reform policies that encourage private economic activity and

greater economic decentralization. There is no assurance, however, that the government of the PRC will continue to pursue these

policies, or that it will not significantly alter these policies from time to time without notice.

Our operations are subject to PRC laws and regulations that are sometimes vague and uncertain. Any changes in such PRClaws and regulations, or the interpretations thereof, may have a material and adverse effect on our business.

The PRCs legal system is a civil law system based on written statutes. Unlike the common law system prevalent in the United

States, decided legal cases have little value as precedent in China. There are substantial uncertainties regarding the interpretation

and application of PRC laws and regulations, including but not limited to the laws and regulations governing our business, or the

enforcement and performance of our arrangements with customers in the event of the imposition of statutory liens, death,

bankruptcy or criminal proceedings. The Chinese government has been developing a comprehensive system of commercial laws,

and considerable progress has been made in introducing laws and regulations dealing with economic matters such as foreign

investment, corporate organization and governance, commerce, taxation and trade. However, because these laws and regulationsare relatively new, and because of the limited volume of published cases and judicial interpretation and their lack of force as

precedents, interpretation and enforcement of these laws and regulations involve significant uncertainties. New laws and

regulations that affect existing and proposed future businesses may also be applied retroactively.

Our principal operating subsidiary, Fuqi China, is considered a foreign invested enterprise under PRC laws, and as a result is

required to comply with PRC laws and regulations, including laws and regulations specifically governing the activities and conduct

of foreign invested enterprises. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may

have on our businesses. If the relevant authorities find us in violation of PRC laws or regulations, they would have broad discretion

in dealing with such a violation, including, without limitation:

levying fines;

revoking our business license, other licenses or authorities;

requiring that we restructure our ownership or operations; and

requiring that we discontinue some or all of our business.


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The scope of our business license in China is limited, and we may not expand or continue our business without government

approval and renewal, respectively.

Our principal operating subsidiary, Fuqi China, is a wholly foreign-owned enterprise organized under PRC law, commonly

known as a WFOE. A WFOE can only conduct business within its approved business scope, which ultimately appears on its

business license. Our license permits us to design, manufacture, sell and market jewelry products to department stores throughout

the PRC and to engage in the retail distribution of our products. Any amendment to the scope of our business requires further

application and government approval. In order for us to expand our business beyond the scope of our license, we will be required to

enter into a negotiation with the authorities for the approval to expand the scope of our business. We cannot assure you that Fuqi

China will be able to obtain the necessary government approval for any change or expansion of our business scope.

Recent PRC regulations relating to acquisitions of PRC companies by foreign entities may create regulatory uncertainties

that could restrict or limit our ability to operate. Our failure to obtain the prior approval of the China SecuritiesRegulatory Commission, or the CSRC, for this offering and the listing and trading of our common stock could have amaterial adverse effect on our business, operating results, reputation and trading price of our common stock, and may also

create uncertainties for this offering.

The PRC State Administration of Foreign Exchange, or SAFE, issued a public notice in November 2005, known as Circular

75, concerning the use of offshore holding companies in mergers

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and acquisitions in China. The public notice provides that if an offshore company controlled by PRC residents intends to acquire aPRC company, such acquisition will be subject to registration with the relevant foreign exchange authorities. The public notice also

suggests that registration with the relevant foreign exchange authorities is required for any sale or transfer by the PRC residents of

shares in an offshore holding company that owns an onshore company. The PRC residents must each submit a registration form to

the local SAFE branch with respect to their ownership interests in the offshore company, and must also file an amendment to such

registration if the offshore company experiences material events, such as changes in the share capital, share transfer, mergers and

acquisitions, spin-off transactions or use of assets in China to guarantee offshore obligations.

On August 8, 2006, the PRC Ministry of Commerce (MOFCOM), joined by the State-owned Assets Supervision and

Administration Commission of the State Council, the State Administration of Taxation, the State Administration for Industry and

Commerce, the China Securities Regulatory Commission and SAFE, released a substantially amended version of the Provisions for

Foreign Investors to Merge with or Acquire Domestic Enterprises (the Revised M&A Regulations), which took effect September

8, 2006. These new rules significantly revised Chinas regulatory framework governing onshore-to-offshore restructurings and

foreign acquisitions of domestic enterprises. These new rules signify greater PRC government attention to cross-border merger,

acquisition and other investment activities, by confirming MOFCOM as a key regulator for issues related to mergers andacquisitions in China and requiring MOFCOM approval of a broad range of merger, acquisition and investment transactions.

Further, the new rules establish reporting requirements for acquisition of control by foreigners of companies in key industries, and

reinforce the ability of the Chinese government to monitor and prohibit foreign control transactions in key industries.

Among other things, the revised M&A Regulations include new provisions that purport to require that an offshore special

purpose vehicle, or SPV, formed for listing purposes and controlled directly or indirectly by PRC companies or individuals must

obtain the approval of the CSRC prior to the listing and trading of such SPVs securities on an overseas stock exchange. On

September 21, 2006, the CSRC published on its official website procedures specifying documents and materials required to be

submitted to it by SPVs seeking CSRC approval of their overseas listings. However, the application of this PRC regulation remains

unclear with no consensus currently existing among the leading PRC law firms regarding the scope and applicability of the CSRC

approval requirement. Our PRC counsel, Shujin Law Firm, has advised us that because we completed our onshore-to-offshore

restructuring before September 8, 2006, the effective date of the new regulation, it is not necessary for us to submit the application

to the CSRC for its approval, and the listing and trading of our common stock does not require CSRC approval.If the CSRC or another PRC regulatory agency subsequently determines that CSRC approval was required for this offering, we

may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. These regulatory agencies may

impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation

of the proceeds from this offering into the PRC, or take other actions that could have a material adverse effect on our business,

financial condition, results of operations, reputation and prospects, as well as the trading price of our Common Stock. The CSRC or

other PRC regulatory agencies also may take actions requiring us, or making it advisable for us, to halt this offering before

settlement and delivery of the common stock offered hereby. Consequently, if you engage in market trading or other activities in

anticipation of and prior to settlement and delivery, you do so at the risk that settlement and delivery may not occur.

Also, if later the CSRC requires that we obtain its approval, we may be unable to obtain a waiver of the CSRC approval

requirements, if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding

this CSRC approval requirement could have a material adverse effect on the trading price of our common stock. Furthermore,

published news reports in China recently indicated that the CSRC may have curtailed or suspended overseas listings


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for Chinese private companies. These news reports have created further uncertainty regarding the approach that the CSRC and

other PRC regulators may take with respect to transactions such as this offering.

It is uncertain how our business operations or future strategy will be affected by the interpretations and implementation of

Circular 75 and the Revised M&A Regulations. It is anticipated that application of the new rules will be subject to significant

administrative interpretation, and we will need to closely monitor how MOFCOM and other ministries apply the rules to ensure

that our domestic and offshore activities continue to comply with PRC law. Given the uncertainties regarding interpretation and

application of the new rules, we may need to expend significant time and resources to maintain compliance.

Failure to comply with the United States Foreign Corrupt Practices Act could subject us to penalties and other adverseconsequences.

As our ultimate holding company is a Delaware corporation, we are subject to the United States Foreign Corrupt Practices Act,

which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for

the purpose of obtaining or retaining business. Foreign companies, including some that may compete with our company, are not

subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices may occur from time-to-

time in the PRC. We can make no assurance, however, that our employees or other agents will not engage in such conduct for

which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer

severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of

operations.

We had enjoyed certain preferential tax concessions and the loss of these preferential tax concessions may cause our taxliabilities to increase and our profitability to decline.

Our subsidiary, Fuqi China, is subject to a reduced enterprise income tax rate of 15%, which is granted to all enterprises

operating in the Shenzhen Special Economic Zone. In 2004 and 2005, Fuqi China enjoyed a preferential income tax rate of 7.5%

due to its status as a new business. That status expired effective January 1, 2006. The expiration of the preferential tax treatment

has increased our tax liabilities and reduced our profitability. Additionally, the PRC Enterprise Income Tax Law (the EIT Law)

was enacted on March 16, 2007. Under the EIT Law, effective January 1, 2008, China will adopt a uniform tax rate of 25.0% for all

enterprises (including foreign-invested enterprises) and cancel several tax incentives enjoyed by foreign-invested enterprises. Since

the PRC government has not announced implementation measures for the transitional policy with regards to such preferential tax

rates, we cannot reasonably estimate the financial impact of the new tax law to us at this time. Any future increase in the enterprise

income tax rate applicable to us or other adverse tax treatments, could increase our tax liabilities and reduce our net income.

If we make equity compensation grants to persons who are PRC citizens, they may be required to register with the State

Administration of Foreign Exchange of the PRC, or SAFE. We may also face regulatory uncertainties that could restrictour ability to adopt additional equity compensation plans for our directors and employees and other parties under PRClaw.

On April 6, 2007, SAFE issued the Operating Procedures for Administration of Domestic Individuals Participating in the

Employee Stock Ownership Plan or Stock Option Plan of An Overseas Listed Company, also know as Circular 78. It is not clear

whether Circular 78 covers all forms of equity compensation plans or only those which provide for the granting of stock options.

For any plans which are so covered and are adopted by a non-PRC listed company, such as our company, after April 6, 2007,

Circular 78 requires all participants who are PRC citizens to register with and obtain approvals from SAFE prior to their

participation in the plan. In addition, Circular 78 also requires PRC citizens to register with SAFE and make the necessary

applications and filings if they participated in an overseas listed companys covered equity compensation plan prior to April 6,

2007. We believe that the registration and approval requirements contemplated in Circular 78 will be burdensome and time

consuming.

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Upon the closing of this offering, we intend to make numerous stock option grants under our equity incentive plan to our

officers and directors, some of whom are PRC citizens and may be required to register with SAFE. In addition to our officers and

directors that receive option grants at the close of this offering, future participants of our equity incentive plan or any other equity

compensation plan we may adopt who are PRC citizens may be required to register with SAFE. If it is determined that any of our

equity compensation plans are subject to Circular 78, failure to comply with such provisions may subject us and participants of our

equity incentive plan who are PRC citizens to fines and legal sanctions and prevent us from being able to grant equity

compensation to our PRC employees. In that case, our business operations may be adversely affected.


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Any recurrence of severe acute respiratory syndrome, or SARS, the Avian Flu, or another widespread public health

problem in the PRC could adversely affect our operations.

A renewed outbreak of SARS, the Avian Flu or another widespread public health problem in China, where all of our

manufacturing facilities are located and where all of our sales occur, could have a negative effect on our operations. Our business is

dependent upon our ability to continue to manufacture our products. Such an outbreak could have an impact on our operations as a

result of:

quarantines or closures of our manufacturing facilities or the retail outlets, which would severely disrupt our operations,

the sickness or death of our key officers and employees, and

a general slowdown in the Chinese economy.

Any of the foregoing events or other unforeseen consequences of public health problems could adversely affect our operations.

Because our business is located in the PRC, we may have difficulty establishing adequate management, legal and financialcontrols, which we are required to do in order to comply with U.S. securities laws.

PRC companies have historically not adopted a Western style of management and financial reporting concepts and practices,

which includes strong corporate governance, internal controls and, computer, financial and other control systems. Most of our

middle and top management staff are not educated and trained in the Western system, and we may have difficulty hiring new

employees in the PRC with such training. In addition, we may need to rely on a new and developing communication infrastructure

to efficiently transfer our information from retail nodes to our headquarters. As a result of these factors, we may experience

difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements,

books of account and corporate records and instituting business practices that meet Western standards. Therefore, we may, in turn,

experience difficulties in implementing and maintaining adequate internal controls as required under Section 404 of the Sarbanes-

Oxley Act of 2002. This may result in significant deficiencies or material weaknesses in our internal controls, which could impact

the reliability of our financial statements and prevent us from complying with SEC rules and regulations and the requirements of

the Sarbanes-Oxley Act of 2002. Any such deficiencies, weaknesses or lack of compliance could have a materially adverse effect

on our business.

You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original

actions in China based upon U.S. laws, including the federal securities laws, or other foreign laws against us or ourmanagement.

All of our current operations, including the manufacturing and distribution of jewelry, are conducted in China. Moreover, most

of our directors and officers are nationals and residents of China. All or substantially all of the assets of these persons are located

outside the United States and in the PRC. As a result, it may not be possible to effect service of process within the United States or

elsewhere outside China upon these persons. In addition, uncertainty exists as to whether the courts of China would recognize or

enforce judgments of U.S. courts obtained against us or such officers and/or directors predicated upon the civil liability provisions

of the securities laws of the United States or any

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state thereof, or be competent to hear original actions brought in China against us or such persons predicated upon the securities

laws of the United States or any state thereof.

Risks Related To This Offering and Our Shares

Purchasers in this offering will experience immediate and substantial dilution in net tangible book value.

The assumed public offering price will be substantially higher than the net tangible book value per share of our outstanding

shares of common stock. As a result, investors purchasing shares of our common stock in this offering will incur immediate

dilution of $4.63 per share, based on an assumed initial public offering price of $8.00 per share, the mid-point of the price range set

forth on the cover page of this prospectus. Investors purchasing shares of our common stock in this offering will pay a price per

share that substantially exceeds the book value of our assets after subtracting our liabilities.

We will be controlled by one stockholder after this offering, whose interests may differ from those of other stockholders. As

a result, we could be prevented from entering into potentially beneficial transactions if they conflict with our major

stockholders interests.

Mr. Yu Kwai Chong, our Chief Executive Officer and our largest stockholder, will beneficially own or control approximately

58.0% of our outstanding shares after giving effect to this offering. Mr. Chong possesses significant influence over us, giving him

the ability, among other things, to elect all or a majority of the Board of Directors and to approve significant corporate transactions.

Such stock ownership and control may also have the effect of delaying or preventing a future change in control, impeding a merger,

consolidation, takeover or other business combination, or discouraging a potential acquirer from making a tender offer or otherwise

attempting to obtain control of our company. Without the consent of Mr. Chong, we could be prevented from entering into


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potentially beneficial transactions if they conflict with our major stockholders interests. The interests of this stockholder may differ

from the interests of our other stockholders.

We may allocate the proceeds of this offering in ways that you or other stockholders may not approve.

We intend to use the net proceeds from this offering for general corporate purposes, including expansion of our retail network,

expansion of our production lines, and general working capital purposes. In addition, we may use a portion of the net proceeds of

this offering to invest in or acquire new businesses through mergers, stock or asset purchases, joint ventures and/or other strategic

relationships, although we have no present commitments or agreements with respect to any such material acquisition or investment.

Our management will have broad discretion in the application of the net proceeds from this offering and may apply them in ways

not approved by you or other stockholders. Failure by our management to apply these funds effectively could adversely affect our

ability to continue to maintain and expand our business.

An active trading market for our shares may not develop.

Prior to this offering, there has been no public market for our common stock. Although we have applied to have our common

stock approved for listing on the Nasdaq Global Market, we may not receive approval for listing, and even if we are to receive such

approval, an active trading market for our shares may never develop or be sustained following this offering. The initial public

offering price for our common stock will be determined through negotiations with the underwriters. This initial public offering

price may vary from the market price of our common stock after the offering. You may not be able to sell any shares of common

stock that you purchase in the offering at or above the initial public offering price.

If we fail to maintain effective internal controls over financial reporting, the price of our common stock may be adversely

affected.

We are required to establish and maintain appropriate internal controls over financial reporting. Failure to establish those

controls, or any failure of those controls once established, could adversely impact our public disclosures regarding our business,

financial condition or results of operations. Any failure of these controls could also prevent us from maintaining accurateaccounting records

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and discovering accounting errors and financial frauds. Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley

Act of 2002 require annual assessment of our internal control over financial reporting, and attestation of this assessment by our

companys independent registered public accountants. The SEC extended the compliance dates for non-accelerated filers, as

defined by the SEC. Accordingly, we believe that the annual assessment of our internal controls requirement will first apply to our

annual report for the 2007 fiscal year and the attestation requirement of managements assessment by our independent registered

public accountants will first apply to our annual report for the 2008 fiscal year. The standards that must be met for management toassess the internal control over financial reporting as effective are new and complex, and require significant documentation, testing

and possible remediation to meet the detailed standards. We may encounter problems or delays in completing activities necessary

to make an assessment of our internal control over financial reporting. In addition, the attestation process by our independent

registered public accountants will be new to us and we may encounter problems or delays in completing the implementation of any

requested improvements and receiving an attestation of our assessment by our independent registered public accountants. If we

cannot assess our internal control over financial reporting as effective, or our independent registered public accountants are unable

to provide an unqualified attestation report on such assessment, investor confidence and share value may be negatively impacted.

In addition, managements assessment of internal controls over financial reporting may identify weaknesses and conditions that

need to be addressed in our internal controls over financial reporting or other matters that may raise concerns for investors. Any

actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting, disclosure

of managements assessment of our internal controls over financial reporting, or disclosure of our public accounting firms

attestation to or report on managements assessment of our internal controls over financial reporting may have an adverse impacton the price of our common stock. Our public accountants, Stonefield Josephson, Inc., identified that our accounting for certain

significant transactions were incorrectly calculated or incorrectly recorded. Our public accountants informed us that these

adjustments reflected significant deficiencies in our internal controls over accounting and financial reporting for the year ended

December 31, 2006. We are in the process of improving our internal controls in an effort to improve our control processes and

procedures with training programs that will commence later in 2007; however, there can be no guarantee that we will be successful

in our attempts to correct our significant deficiencies.

Restrictions on the convertibility of RMB into foreign currency may limit our ability to make dividends or other payments

in U.S. dollars or fund possible business activities outside China.

All of our net revenues are currently generated in RMB. Any future restrictions on currency exchanges may limit our ability to

use net revenues generated in RMB to make dividends or other payments in U.S. dollars or fund possible business activities outside

China. Although the PRC government introduced regulations in 1996 to allow greater convertibility of RMB for current account

transactions, significant restrictions still remain, including primarily the restriction that foreign-invested enterprises may only buy,


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sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business after providing valid

commercial documents. In addition, remittance of foreign currencies abroad and conversion of RMB for capital account items,

including direct investment and loans, is subject to government approval in China, and companies are required to open and

maintain separate foreign exchange accounts for capital account items. We cannot assure you the Chinese regulatory authorities

will not impose more stringent restrictions on the convertibility of RMB, especially with respect to foreign exchange transactions.

Because our revenues are generated in RMB and our results are reported in U.S. dollars, devaluation of the RMB could

negatively impact our results of operations.

The value of RMB is subject to changes in Chinas governmental policies and to international economic and political

developments. In January, 1994, the PRC government implemented a unitary managed floating rate system. Under this system, the

Peoples Bank of China, or PBOC, began publishing a daily base exchange rate with reference primarily to the supply and demand

of RMB against the U.S. dollar and other foreign currencies in the market during the previous day. Authorized banks and

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financial institutions are allowed to quote buy and sell rates for RMB within a specified band around the central banks daily

exchange rate. On July 21, 2005, PBOC announced an adjustment of the exchange rate of the U.S. dollar to RMB from 1:8.27 to

1:8.11 and modified the system by which the exchange rates are determined. This modification has resulted in an approximate 7.3%

appreciation of the RMB against the U.S. dollar from July 21, 2005 to May 2, 2007. While the international reaction to the RMB

revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even

more flexible currency policy, which could result in further fluctuations of the exchange rate of RMB against the U.S. dollar,

including possible devaluations. As all of our net revenues are recorded in RMB, any future devaluation of RMB against the U.S.

dollar could negatively impact our results of operations.

Sales of a substantial number of shares of our common stock following this offering may adversely affect the market priceof our common stock and the issuance of additional shares will dilute all other stockholdings.

Sales of a substantial number of shares of our common stock in the public market or otherwise following this offering, or the

perception that such sales could occur, could adversely affect the market price of our common stock. After completion of this

offering, our existing stockholders will own approximately 66.7% of our common stock assuming there is no exercise of the

underwriters over-allotment option.

After completion of this offering, there will be approximately 19,260,955 shares of our common stock outstanding. Of our

outstanding shares, the shares of common stock sold in this offering will be freely tradable in the public market, except for any

shares sold to our affiliates, as that term is defined in Rule 144 under the Securities Act of 1933, as amended (the Securities

Act). In addition, our certificate of incorporation permits the issuance of up to approximately 80,739,045 additional shares ofcommon stock after this offering. Thus, we have the ability to issue substantial amounts of common stock in the future, which

would dilute the percentage ownership held by the investors who purchase our shares in this offering. See Shares Eligible for

Future Sale on page 71 of this prospectus for further information regarding circumstances under which additional shares of our

common stock may be sold.

We, each of our directors and senior officers, and each holder of 5% or more of our common stock have agreed, with limited

exceptions, that we and they will not, without the prior written consent of the Merriman Curhan Ford & Co. on behalf of the

underwriters, during the period ending 180 days after the date of this prospectus, among other things, directly or indirectly, offer to

sell, sell or otherwise dispose of any of shares of our common stock or file a registration statement with the SEC relating to the

offering of any shares of our common stock.

After the lock-up agreements pertaining to this offering expire 180 days from the date of this prospectus unless waived earlier

by Merriman Curhan Ford & Co., up to 11,184,052 of the shares outstanding prior to this offering will be eligible for future sale in

the public market at prescribed times pursuant to Rule 144 under the Securities Act, or otherwise. Sales of a significant number of

these shares of common stock in the public market could reduce the market price of the common stock.

A total of 2,366,864 shares registered under a registration statement on Form S-8 to be filed by us after the consummation of

this offering also will be available for sale into the public markets, subject to the vesting of restricted stock and to the exercise of

any future issued options, if any.

Furthermore, shares of our common stock are held by Bay Peak LLC, which was a promoter of VT Marketing Services, our

predecessor, and may not be sold by this promoter pursuant to Rule 144 under the Securities Act. The position of the staff of the

Division of Corporation Finance of the Securities and Exchange Commission is that any such resale transaction under Rule 144

would appear to be designed to distribute or redistribute such shares to the public without coming within the registration

requirements of the Securities Act. Therefore, Bay Peak can only resell the shares it holds as of the date hereof through a

registration statement filed under the Securities Act. Further to a registration rights agreement with Bay Peak LLC, we agreed to

register shares of our common stock held by it upon request after the expiration of the 180-day lock-up period commencing from

the date of this prospectus


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if we are then eligible to use Form S-3 and if such shares are not then saleable under Rule 144. Bay Peak LLCs registration rights

are subject to the lock-up agreement it entered into with Merriman Curhan Ford & Co. that expires 180 days from the date of this

prospectus, unless waived earlier. There is a risk that such sales pursuant to a registration statement filed under the Securities Act

would have a depressive effect on the market price of our securities in any market which may develop for our securities. If Bay

Peak LLC did not hold these shares, there would not be the same risk of a depressive effect on the price of the shares you hold.

We do not foresee paying cash dividends in the foreseeable future and, as a result, our investors sole source of gain, if any,will depend on capital appreciation, if any.

We do not plan to declare or pay any further cash dividends on our shares of common stock in the foreseeable future and we

currently intend to retain any future earnings for funding growth. Prior to the reverse merger we effected with VT Marketing

Services, the predecessor of Fuqi International, Inc. (the Reverse Merger) in November 2006, we were wholly-owned by our

founder and Chief Executive Officer, Mr

Fuqi Prospectus

Documents

Transcript of Fuqi Prospectus